Things you need to know.
– CPI impresses – will PPI do the same?
– Can JJ sound neutral at all?
– FED expected to skip – but will they skip again in July? – Pay attention to the language…. read between the lines.
– Try the Lemon Walnut Chicken Cutlets
And the results are in……CPI continues to decline….and investors/traders and algo’s loved it…. although if you are a ‘short trader’ you keep getting your arse handed to you…. why? Because when you are short – you want and expect stocks to go lower and when they don’t – you have to cover that position which forces you to become a BUYER – only adding to the buying frenzy that already exists and that only sends stocks higher and don’t think that the algo’s make it any easier for you….(they don’t)….causing you MORE pain……but that’s another story….
Stocks continue to climb – as if ‘trees can grow to the sky’ as the data improves…. Inflation is now 60% of what it was in July 2022 (when it ticked at 9.1%). We saw gains across every sector – except Utilities – if you call a 0.02% move lower really a ‘sell off’! Industrials and Basic Materials helped to light the place fire…..all this ahead of today’s PPI report and the FOMC announcement only hours from now…..By the closing bell – the Dow was up 145 pts or 0.4%, the S&P’s up 30 pts or 0.7%, the Nasdaq up 111 pts or 0.8%, the Russell (those are the SMID’s) up 23 pts or 1.2% and the Transports up 143 pts or 1%.
So, when the data suggests that the FED may have figured it out and done the right thing – Algo’s go into a buying frenzy while investors who have been sitting this out -waiting for the Mikey Wilson pullback (S&P 3000) – put more money to work….…which is what happened yesterday, the day before and the days before that…in fact – the algo’s and investors have been so enamored with the FED and the improving inflation data that they have been buying into this market for weeks (and months) now….I mean just look at the charts…..they are all moving up and up some more and up some more after that! The VIX – remains near historic lows only adding to the excitement….as that suggests there is little to no fear by investors…. which is in itself a contra indicator……. Capisce?
Topline CPI yesterday showed that y/y inflation rates we up 4% – down from 4.9% last month and below the estimate….and btw – the last time topline inflation was at 4% was in May 2021…. (2 yrs. ago….) on its way to 9.4% by July 2022. Now CPI ex food and energy came in at +5.3% – which was above the expectation, but below the prior read of 5.5%…..and that also suggests that inflation is subsiding – but it still exists – maybe even a bit stronger than JJ would like, but the trend is your friend and the trend is lower…
So, now we are at a crossroads…. Will the CPI data and today’s PPI data cause JJ to become neutral…. not hawkish nor dovish…which would suggest a HOLD on rates rather than any speculation of future hikes and future cuts. For me – that is the goal…. you want to get to a place where the FED has gotten monetary policy to equilibrium. – where the pendulum has swung left, swung right and is now in the center. What we used to say was ‘normal’. And when we get there, it doesn’t mean that we won’t see any kind of pullback – of course we will, because it’s the economics that changes and that then changes what investors are willing to pay for stocks. If rates hold steady at say 5 – 5.25% – with no indication from month to month that they are going to change like they have for the past 16 months – then it becomes easier for companies to plan on capital expenditures, on forward guidance, on hiring and firing, on planning for growth. It also becomes easier for investors to assess valuations…. without feeling that your back is against the wall…. Which is what it feels like now…. I mean the FOMO crowd are tripping over each other as they try to ‘get in’…. only because they chose to get out when they got nervous….
Now, on a day like yesterday, that is exactly what it felt like….because while the data was better, it was NOT so good that the reaction should have taken stocks higher…the way it did, I mean the S&P is up 8% from the last FOMC meeting in May – (5 weeks ago), taking the S&P up 13% ytd. The Nasdaq is up 14% since then – taking it up 30% ytd…. But inflation is not dead (yet). CPI Ex food and energy is still running at 5.3% – that is 3.3% above the target…..and it is not guaranteed that it won’t turn up again…in the months ahead (like we saw in the UK) -which would ignite that Loretta Mester (Cleveland FED Pres), Jimmy Bullard (St Louis FED President) and Neely Kashkari (Minneapolis FED President) narrative of higher rates once again….. I’m not saying that I’m unhappy – quite the contrary – I’m invested and I’ve been invested – I don’t try to pick tops or bottoms with my long term account (and nor should you), therefore I’m NOT chasing anything…I’m letting it run and putting new money into the underperformers that we discussed….Industrials, Financials, SMIDS, Aerospace and Defense & Healthcare etc…… I own tech, so I’m not missing out and have no intention of buying more up here – as it feels just a bit ‘stretched’….and I’m good with that.
The big news today besides the FOMC announcement at 2 pm is the 8:30 am PPI (Producer Price Index) report – that will detail inflation at the producer level…and this is important- why? Because it is a great leading indicator of what the next CPI report will be…. because it starts at the producer level and then makes its way to the consumer level….and so a further decline in the PPI – will speak to further declines in next month’s CPI – capisce? The Key number today – is PPI – Ex food and Energy y/y and that is expected to be +2.9% – down from 3.2% last month and down from 11.3% last July…. (Just to put it in perspective) …. Now if that is the case – then I would say that the chances are even better to see CPI come in at sub 5% next month…..and that would be seen as a real positive and offer cover for the FED to ‘skip’ in July as well….and if they do that- then that means they are fairly confident that they will remain successful – Remember – there is NO August FOMC meeting (but there is the August Jackson Hole Boondoggle – this year it is titled – ‘The Structural Shifts in the Global Economy’ – and it takes place on August 24-26) which means that the next FOMC meeting after July is September 20th…..so what I am saying is – if they skip in July- it will be 9 weeks until they meet again….vs. the regular 5 weeks which would suggest to me that we reached the top of the arc. But – hey…. we’ve got plenty of data to digest in the weeks ahead….so- I’m going out on a limb here…. but it’s just my gut feeling.
The focus today will be about how dovish or hawkish JJ’s speech is….or will it be neutral…if there is such a thing….trust me the media will try to pick a side –they will make him be one or the other – they will never let him be neutral…it doesn’t sell, it’s boring, it’s not hysterical enough….
In any event – we saw strength across the board in almost every sector….Utilities were the only sector that was lower – if you think -0.02% is significant – although the sector is down 6% ytd…(We can thank 5% short duration treasuries, 5% 12 month CD’s and 2 yr. treasuries yielding 4.6%). Everything else was higher….Basic Materials up a whopping 2.25%, Industrials up 1.15%, Healthcare up 0.4%, Real Estate up 0.7% – these are all sectors that have been underperforming all year – suggesting that the rally is broadening out and if today’s PPI is weaker and the FED skips leaving the FED funds rate in the 5% – 5.25% range – then investors can expect that they have succeeded in ‘normalizing’ monetary policy….and for anyone who thinks 2% fed fund is normal….I’d say Really!! Wake UP! Normal IS 5%, not 2%, 1% or 0%….In my opinion – the FED should hold them here and be done with it….because IF they start cutting rates – it’s not because its sunny outside, oh no, if they start cutting rates its because they sent the economy into a black hole…..the problem now is that there is a whole generation of people who think that 0% is NORMAL….Let’s be clear – it is NOT.
Oil has taken back the $70 handle – this morning it is up 70 cts at $70.12/barrel…..….China cuts their short term lending rates in a bid to support their economy (supportive of building demand) ahead of some key eco data due out tomorrow….think Industrial Production, Retail Sales and Housing – It is also higher ahead of today’s FOMC meeting…..where it is expected that the FED will skip and possibly skip again in July…and that will allow the dollar to retreat a bit and that will benefit the commodity complex…think oil and gold among others. Remember – commodities are priced in dollars – so a weaker dollar sends commodities higher while a stronger dollar puts pressure on the complex. For now – Oil remains in the $66/$75 range – that is until the Saudi’s force another production cut by OPEC+ members.
And Gold is a perfect example of dollar logic….Since the May 4th high of $2100 – gold is down 6% at $1,965….during that time – the US dollar rose by 3.5% – so if we see the dollar retreat back to the trendline – it is possible that we will see Gold pierce $2000 once again and if the dollar weakens further – then expect Gold to continue to push higher. At the moment – we remain in the $1950/$2000 trading range.
US futures are mixed…. Dow down 56 pts, the S&P’s up 6, the Nasdaq +30 and the Russel up 4. AMD announces a new chip that is set to compete head-to-head with Nvdia chips…. CEO Lisa Su making that announcement yesterday afternoon…. the chip is named the M1300X, and it starts shipping in the 4th qtr. of 2023 and represents the biggest challenge to Nvdia’s dominance. This morning AMD is up 2% at $127, NVDA is up 0.6% at $412.
European markets are UP…. The UK announces that their economy grew by 0.2% – which was expected……- the growth coming from the services economy. Other than that – European investors await today’s FED announcement, tomorrow’s ECB announcement along with the Chinese eco data and Friday’s BoJ announcement. At 6:30 am – markets across the eurozone are up about 0.7%.
The S&P closed at 4369 – up 30 pts…. Moving further into the century and now closer to the next century (4400) rather than the current century. Yesterday’s data is still settling in as markets await today’s data. But look – while it’s all exciting – does it guarantee a continued push higher? No, it does not. What it does guarantee is that the FED did manage to navigate a softer landing than many anticipated – but I do think that so much of that is already reflected in the recent surge. So, no one should be surprised if we see some consolidation (think pullback) on any of this news. A pullback to 4250 ish would not be out of the question….and a pullback to the trendline at 4160 would also not be out of the question and it would only be a 4% pullback…. The upside? Make it up!
Stick to the plan, DCA (dollar cost average) into it. Build out the defensive part of your portfolio….do not keep chasing tech names that are way overdone… If you are nervous about a decline – position yourself with some of the contra trades that offer protection…. the SH, PSQ, DOG even the VIXY.
Take good care.
Chief Market Strategist
kpolcari@slatestone.com
“The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment. The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kace
Capital Advisors.”
Chicken Cutlets in Lemon/Walnut Sauce
For this you need: Boneless Chicken breast – (preferably thin sliced) – if not then you can pound them. Flour, olive oil, (I use butter), fresh chopped parsley, lemon zest, lemon juice, walnuts, diced onion and chicken broth.
Begin by dredging the cutlets in seasoned flour (s&p). Shake the excess off. Set it aside.
In a lg frying pan – heat up some olive oil (w some butter) and sauté the diced onion until soft – maybe 8 – 10 mins…. Do not burn.
Remove the onions and set aside. Next – add the chicken breasts and brown on both sides.
While browning – chop the walnuts (food processor) and mix with the chopped parsley and lemon zest – not too much but enough so that you get the flavor…. (If unsure – add less and taste. You can always add more).
When the cutlets are browned on both sides – add in the chicken broth – enough to bathe them – do not drown. Add in the onions and about a tblsp of lemon juice – cover and simmer for about 5 mins….
Remove the chicken and set on a warmed serving platter leaving the juice in the pan. Turn up the heat to med hi and add the walnuts/parsley/zest. Allow the juice to thicken a bit – should be no more than 3 mins max. Pour the sauce over the cutlets and serve with roasted potatoes and maybe some sautéed spinach and a large mixed salad dressed in a champagne vinaigrette.
Buon Appetito
